On Wednesday, March 12, 2025, Finance Minister Enoch Godongwana is scheduled to present his revised budget. Even in the absence of a substantial VAT increase, economists anticipate that taxpayers will endure hardship.
Nedbank’s economists predict that the 2025 Budget 2.0 will be significantly different from the version that was intended to be presented in February.
The initial budget proposed a 17% increase in VAT to generate R58 billion in 2025 to support the government’s ambitious expenditure initiatives.
Nevertheless, it is probable that additional trade-offs will be implemented in the future, as a two percentage point increase in VAT is no longer feasible.
The following are the most significant revenue modifications anticipated in the new budget in comparison to the original plan:
Increase in VAT
The VAT increase was the primary issue in the original budget; however, the Government of National Unity (GNU) partners have decided to forgo it in 2025.
Nevertheless, it is improbable that a VAT increase in some form can be averted, as Nedbank anticipates a 0.5%-1.0%pt increase to be announced on Wednesday.
Nedbank’s economists have interpreted Treasury’s assertion that South Africa’s VAT is still lower than the 19% observed in peer countries as a concerted effort to achieve that level.
They stated that additional VAT increases are anticipated in the years ahead.
Original Budget: A 2% percentage point increase in VAT to 17%
New Budget: A 0.5-1.0% percentage point increase in VAT, with additional increases in 2026 and 2027 for personal income tax.
In order to provide taxpayers with some respite while still generating R1.5 billion in revenue, the initial budget proposed minor adjustments to the tax brackets that were below inflation.
Treasury is likely to eliminate these modifications and maintain the same tax categories for 2025, thereby generating additional revenue, as the original VAT plan has been dispensed with.
Original Budget: Marginal adjustments to tax brackets that are below inflation in order to offer some relief.
New Budget: No modifications to tax brackets or fueling bracket creep.
Fuel Tax
The fuel levy and Road Accident Fund levy have been suspended since 2022, and the original budget intended to maintain this status for an additional year.
This would have resulted in R4 billion in “relief” for ratepayers.
Nevertheless, Nedbank’s economists now predict that these taxes will be raised this week, with additional increases occurring in the subsequent years as Treasury attempts to address the deficit.
No adjustment for fuel levies was made to the original budget.
New Budget: The General Fuel Levy and Road Accident Fund Levy have been increased, with additional adjustments to come.
Tax deductions for medical assistance
The original budget did not include an inflation-based adjustment for medical aid tax credits in 2025, which would have generated R1.5 billion, similar to the tax categories.
They anticipate the same in the forthcoming budget.
However, the government’s intention to ultimately eliminate this tax break in order to fund the National Health Insurance (NHI) scheme means that its days are numbered.
The economists do not anticipate that the trigger will be pressed at this time.
Original Budget: There was no inflation adjustment; however, it remains valid.
No inflation adjustment has been made in the new budget; however, sin taxes remain applicable.
In the initial budget, excise duties on alcohol and tobacco were already significantly higher than inflation. Currently, economists anticipate that it will be even more substantial.
Also scheduled for 2025 are consultations regarding a three-tier progressive tax rate on beer and wine.
Alcohol was increased by 6.8% in the original budget, while tobacco was increased by 4.8%-6.8%.
New Budget: The previous adjustments were made at an even greater level and continued to escalate over the course of the next few years.
Issue with expenditures
Nicky Weimar, the Chief Economist at Nedbank
It is evident that the National Treasury will need to make substantial adjustments to its revenue-generating strategies; however, the specific measures that will be implemented to balance the expenditures are uncertain.
The government has been unable to contain the rapid increase in public debt and expenditure, despite the Treasury’s calls for fiscal consolidation over the years, as Nedbank observed.
In the initial budget, expenditure was once again anticipated to exceed expectations due to an increase in non-interest spending, particularly in infrastructure investment and social spending.
In contrast to the MTBPS estimate of 4.8%, expenses increased by 8.1%.
The spending spree’s primary goal was to finance the Social Relief of Distress (SRD) grant, as well as to resolve the expanding public wage bill, facilitate the recruitment of competent workers in health, security, and education.
Nedbank observed that no allocations were made for the SRD grant beyond administrative amounts in 2026 and 2027. Nevertheless, the expenditures for 2025 totaled R35.3 billion.
However, the grant is not likely to be revoked. In reality, the expenditure will exceed the allocated amount.
The bank stated, “We anticipate that the SRD grant bill will rise to R40 billion in the two years following 2025.”
In order to accommodate the higher wage settlements reached in 2024 and facilitate the hiring of critical workers such as physicians, nurses, teachers, and police officers, the public sector wage bill is anticipated to increase by 8% in FY2024/25, absorbing 38% of revenue.
Nedbank stated that the original budget envisaged wage bill growth at an annual average of 5.7% over the medium term. However, there is a possibility of higher increases unless departments are able to constrain their headcount.
According to Nedbank, it is probable that the expenditure component of the initial budget was understated, suggesting that South Africa is on the brink of a crisis.
Nedbank stated that the fiscal crisis that South Africa is on the brink of should be exacerbated by the VAT increase.
“Expenditure has exceeded revenue growth for more than a decade, leading to a public debt ratio that is consistently increasing and widening budget deficits.”
“The moment has arrived to address expenditure inefficiencies with urgency.”
